$A climbs on signal of more rate rises

The dollar surged to a fresh seven-year high after the close of local trading, as market players took comments from the Reserve Bank deputy governor yesterday as a sign that the central bank had not yet finished raising rates.

At the 5pm finish of the local session, the Aussie was at US79.36¢, up from Monday's US79.07¢, but just after 7.30pm it had reached US79.74¢ in London trading.

Economists said RBA deputy governor Glenn Stevens had indicated that the bank still had a tightening bias to its interest rate policy.

SG Australia strategist John Horner said the deputy's speech set a slightly more "hawkish" tone, which prompted strong buying of the currency in afternoon trading.

Mr Stevens said in his speech that the RBA's "neutral" interest rate would help keep the economy growing at its full potential with steady inflation, in the absence of any external shocks.

While Mr Stevens admitted that estimates of the neutral rate "always have a margin for error", he used the past decade as a rough guide.

He said that when the overnight cash rate was between 4 and 5 per cent it had produced "marked accelerations" in spending, but when it was between 6.25 and 7.5 per cent spending had slowed.

Economists said Mr Stevens showed that the neutral rate was thus somewhere between 5 and 6.25 per cent. "With overnight cash currently at 5.25 per cent, closer to the bottom end of that band, the consensus in the market is that another rate hike or two will be needed to get cash back to a 'neutral' rate of 5.5 to 5.75 per cent," said AAP chief economist Garry Shilson-Josling.

Mr Horner said the dollar looked ready to test US80¢ in the next couple of days.

Bonds closed weaker as yields surged after Mr Stevens' speech.

The benchmark Commonwealth 10-year bond closed at a yield of 5.590 per cent, from 5.525 on Monday, while the three-year bond was at 5.370 per cent from 5.295 per cent.